Davide Johnston – Is SMSF Lending Living on Borrowed Time?

© PPA Articles — www.propertyplanning.com.au.
Reproduced with permission.

Key points

  • Labor has announced their top five measures to improve housing affordability
  • This includes three new measures to compliment the two previously announced regarding negative gearing and capital gains tax
  • We focus on the key considerations for the proposal to ban SMSF borrowing to purchase property

Housing affordability continues to be a central focus of the media leading into the Federal budget. The Labor Party recently announced measures the party would introduce if elected, placing more pressure on the incumbent government to make change.

These measures include:
1. a ban on self-managed super fund (SMSF) borrowing
2. doubling fees and penalties for foreign buyers
3. nation-wide tax on investors who leave properties vacant

To join Labor’s pre-existing policies of:
4. scrapping negative gearing for established properties
5. reducing capital gains tax (CGT) exemption for investment properties

Today we will shine the spotlight on the potential to ban SMSF borrowing. If we turn back the hands of time to 2012, believe it or not, the property market was subdued in Melbourne and Sydney. People were umming and ahhing over whether to purchase due to a lack of perceived return. The concern for would-be property buyers was the prospect of sustained low growth in property values.

In 2012 the level of borrowings in SMSF was still limited and as we noted in our Infront Newsletter, the new influx of money from SMSF would provide more demand for property and help provide an uplift to the market. Jump forward to 2017 and Sydney and Melbourne property markets are flying.

Oh, how sentiment changes…….and the Midnight Oil classic ‘Short Memory’ starts ringing in my head!

Since then the numbers owning direct property within an SMSF have increased significantly. Borrowings by self-managed super funds has grown from $2.5 billion to $24 billion. This upward trend is likely to continue due to superannuation being tax friendly, a prime vehicle to fund retirement, and of course, Australians love affair with property.

Who could have predicted this? Well, anyone really.

It doesn’t take much to tip a relatively balanced market into one that is lacking in supply. Add a few billion dollars’ worth of bank loans supported by a substantial chunk of Australian’s super and sprinkle it with a bunch of new foreign buyers and you have a bubbling broth of hot Sydney and Melbourne property prices.

It reminds me of the book my three-year-old son has where the cow, the horse, the pig, and finally the mouse jump in the boat, and of course, that is when the boat sinks! The analogy being the SMSF money and increase in foreign buyers are the collective mouse, and the boat being the previously evenly balanced property market!

Now of course, in the real world it isn’t quite that one dimensional, but there is no doubt that more demand with a similar level of supply increases values in any marketplace. Even if SMSF’s only make up a couple per cent of the overall property market. That is two properties of every 100 are being purchased by an SMSF. I’m sure there is a statistics wizard who could show that the demand of an extra 2% can have correlate to a much greater percentage rate of price increase – say 10-20%!

All that said, our concern from the onset of SMSF being able to borrow to purchase property was not so much about the extra flow of cash into the property market, but that consumers would make poor decisions with their super that could cost them significant sums in retirement. Think mining town property gone bust, think over supply of off the plan apartments valued at significantly less than the purchase price years later!

Successful investing has always been, and always will be about the quality of the asset that you invest in. Anecdotal evidence suggests that large numbers of unsuspecting consumers have been duped into acquiring low-quality assets within SMSF.

The property industry is unregulated which enables property marketers and spruikers to set up shop quickly. This enables those focused on selling property to do their best – or worst as the case may be, in a short period of time! The property salesmen and women often masquerade and convincingly appear to be professional advisers to the average consumer.

Some SMSF novices in hindsight will discover that they would have been better served to continue to purchase shares and other investments. At least this would have occurred within a regulated market place. Not that this alone guarantees results or ethical behaviour, but it does reduce the risks.

With property, it often takes years until the realisation hits home of an underperforming asset. This is unlike shares, where prices change daily, property is an asset class that is often harder to gauge the sustainability of capital growth over the shorter term.

We have been commenting on the SMSF market and predicted the impact it would have on the market for some time. Some of our previous suggestions to safeguard consumers against potentially derailing their super via borrowing within an SMSF were to –
• restrict borrowing to 50% of the property value
• implement a mandatory minimum loan balance in the super fund
• enforce diversification.
We note it is most definitely easier to suggest ideas, and much harder to legislate and design the parameters.

David Murray, the author of the Financial System Inquiry for the Abbott government suggested that SMSF lending be banned. This was one of only a few of his recommendations that were not actioned. Last week Murray in response to the Labor party policy proposal once again suggested that the current government ban SMSF borrowing. He is worried that the Labor policy announcement will trigger a stampede of SMSF property buyers prior to the next election in case Labor win!

I think his sentiment is right that the announcement places a sense of urgency to purchase in SMSF sooner rather than later. I’m sure there will be many others thinking the same thing.

As keen Property Planners we will be watching this space closely……

All the best with your Property Planning!

David Johnston is the founder of Property Planning Australia and the author of ‘How to succeed with property to create your ideal lifestyle’ and ‘Property for life – using property to plan your financial future’

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